Following the Flows

Thoughts on the Market vor 2 Jahren

0:00

5:09

Our Chief Global Cross-Asset Strategist, Serena Tang, explains
where funds are moving across global markets currently, and why
it matters to investors.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Serena Tang, Morgan
Stanley’s Chief Cross-Asset Strategist. Along with my colleagues
bringing you a variety of perspectives, today I’ll dig into the
concept of fund flows, how they shape global markets and why they
matter to investors.

It’s Thursday, August 1, at 10am in New York.

Finance industry professionals often use the term “flows” when
looking at where investors are, in the aggregate, moving their
money. It refers to net movements of cash in and out of
investment vehicles such as mutual funds and exchange-traded
funds, or in and out of whole markets. By looking at flows,
investors can get a good sense of where market winds are blowing
and, essentially, where demand is at any given moment. Now,
whether you’re a retail or institutional investor, having a
perspective on market sentiment and demand are powerful tools. So
today I’m going to give you a snapshot of some key flows, which
should give a sense of demand and the mood right now; and what it
means for investors.

First of all, despite the recent rally in global equities
year-to-date, we've yet to see an investor rotation, or portfolio
realignment, from bonds to stocks. Flows into bonds are still
leading flows into stocks by a pretty large margin. And unless
stocks cheapen materially, we don’t expect this trend to reverse
anytime soon. In addition, fund flows into large-cap equities
still dwarf those into small-caps year-to-date. Although we saw a
brief reversal of this trend in June, large caps flows have swung
back to prominence.

We do see hints of sector rotation within equities, as investors
shift to what they see as more promising stocks; but it’s not a
clean or entirely unambiguous story. The Science & Tech
sectors – which saw a notable drop-off in flows from the first to
the second quarter of this year – still lead year-to-date; and
flows represent nearly a third into all flows into equities. More
cyclical sectors like Basic Materials and Financials attracted
more capital than in the first and second quarter, while
defensive sectors such as Consumer Goods saw a softening of
outflows compared to the same period.

From a global perspective, we also look at flows in and out of
particular regions or markets. So, year-to-date, US stocks
received about US$43 billion in net inflows while rest-of-world
stocks saw about US$15 billion in net outflows. Now, there were
some exceptions – with India, Korea, and Taiwan leading – seeing
significant inflows year-to-date.

We look at flows within categories too, so within fixed income,
for example, we are seeing flows toward less risky assets;
revealing what we call a risk-off preference. Higher quality,
Investment Grade funds – raked in about US$92 billion in net
inflows year-to-date, while US treasuries saw only at US$25
billion. That Treasury number is actually significantly higher
than what we saw from the first quarter to the second quarter,
while inflows to High Yield and low-quality Investment Grade
corporates have slowed compared to the start of the year.

Finally, money market funds – that is mutual funds that invest in
short-term higher quality securities – have not yet really seen
sustained outflows, as one would expect when investors believe
shorter term yields would come down, as central banks start to
ease. Rather there’s been some $70 billion in net inflows through
the first half of this year. Although we’re sympathetic to the
view that money market outflows should begin when the Fed starts
cutting rates, there’s actually a considerable lag between first
cut and those outflows, as we have seen in the last two rate
cutting cycles.

But what does all of this mean for investors? Well, it suggests
they still have a defensive tilt, and they shouldn’t really be
jumping on the rotational story. The current yield environment
means rotation from fixed income and money market funds into
riskier assets is still some way away. Investors also shouldn’t
look at the dry powder/cash on the sidelines narrative as the big
tailwind for riskier assets -- because it’s not coming any time
soon. That said, we still like non-government bonds because this
is where cash would go first if and when those flows begin. We
also like global equities, but more so because the benign macro
backdrop we are forecasting supports this.

We’ll keep you up to date if there’s any change in the direction
of market winds and fund flows.

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